What to Do With Extra Retirement Money – Ask the M-Network

The M-Network, to which I belong, has been answering reader questions as part of Ask the M-Network. These answers are not professional advice, just our opinions, given in hopes that multiple perspectives will help the querent think through the situation. Michael, a long-time reader, submitted this question:

I invest in my employer-matched 401(k) but have extra savings that I’d like to grow for retirement. Should I put the money in an IRA (tax-deferred growth) or keep it taxable and use it for a business?

My Thoughts

It depends on how you feel about what you’re already investing for retirement. Investing in your own business instead of something like an index fund is like investing in a risky startup that you hope will pay off. Some people allocate a certain percentage of their investments toward riskier stocks/P2P lending/etc.

I would look at this extra money in terms of a percentage of your overall investments and figure out whether that’s a percentage you’re comfortable with risking. I would also advise evaluating each business expenditure for its potential payoff. If you’re looking at your business in terms of an investment for your future, then it’s important to continue to treat it as one.

I’ve found having a small business and alternative income streams worthwhile, though I haven’t spent a significant amount of money on them (what I do spend comes out of the business already and just goes back in). Good luck!

Michael, you are indicating two different goals – saving for retirement and starting a business. The first thing you need to do is decide which of these is more important to you – both now and in the future.

Regarding a business – Do you have a business in place, or a firm idea of what your start up costs will be? Do you have a business plan and is this something you are 100% sure you want to pursue? If you can answer yes to all of these questions, then you may want to consider using the money for a business. Keep in mind you can always invest for retirement with a self-employed retirement plan if your business becomes profitable. But if you are saving for a business idea that you “might have one day” then pass for now.

Regarding an IRA – You can never go wrong saving for your retirement. But if you think you may need the money before you are eligible to make IRA withdrawals, then I don’t recommend investing in an IRA. If you need access to those funds then early withdrawal penalties will cause you to take a huge hit.

Save for retirement or start a business… both are great options and excellent goals. Good luck with whichever you choose!

I think you need to ask yourself some more questions. Investing in starting a business is riskier than just sticking money in boring and sensible index funds or however you would choose to invest for retirement. Investing in starting a business is the exact opposite of diversification, and it’s not necessarily going to help you achieve a retirement goal.

So, which way you should jump depends on whether you’re on track to reach retirement comfortably without this extra money, whether starting a business is more important to you than prioritising retirement investing at this time, whether you have a sensible and well diversified investment portfolio, whether you have a solid business idea, plan and market, whether you are near to retirement or far away.

To be honest, if it was me making the decision it wouldn’t be about starting a business as a retirement vehicle, it would be about choosing between investing for retirement, or starting a business for its own sake.

Got your own financial question? Want to see multiple perspectives? Ask the M-Network. Again, these answers are not professional advice, just our opinions, given in hopes that multiple perspectives will help the querent think through the situation.

First, love that word “querent.” Thank you all for your perspectives. I won’t start a business for its own sake, but entrepreneurship does benefit me in ways an index fund won’t. Thanks for a good reminder to make decisions in light of the *whole* portfolio – job, 401(k), everything.

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